Question

8. The table below shows the weekly marginal cost (MC) and average total cost (ATC) for Buddies, a perfectly competitive firm that produces novelty ear buds in a competitive market. The market price of ear buds is $6.00 per pair.

Quantity of Ear buds	MC ($)	ATC ($)
5	-	9
10	2	5.5
15	2.44	4.48
20	3.56	4.25
25	4.5	4.3
30	5.02	4.42
35	5.96	4.64
40	8.56	5.13

Instructions: In part a, enter your answer as the closest given whole number.

a. If Buddies wants to maximize its profits, how many pairs of ear buds should it produce?

      pairs

Instructions: In parts b-d, round your answers to 2 decimal places.

b. At the profit-maximizing quantity, what is the total cost of producing ear buds?

     $

c. If the market price for ear buds is $6 per pair, and Buddies produces the profit-maximizing quantity of ear buds, what is Buddies weekly profit?

     $

d. If the market price is $5.50 per pair, and Buddies produces the profit-maximizing quantity of ear buds, what is Buddies weekly profit?

     $

e. Buddies earns a normal profit when

marginal cost equals average cost at the minimum of average cost.

marginal cost equals average cost.

marginal cost equals marginal revenue at the minimum of marginal cost.

average cost equals average revenue at the minimum of average cost.

10. If a purely competitive firm shuts down in the short run,

it will realize a loss equal to its total variable costs.

it will realize a loss equal to its explicit costs.

it will realize a loss equal to its total fixed costs.

its loss will be zero.

Answer 1

a) For profit maximization he will sell quantities where price is greater than or equal to MC. Therefore, he will sell 35 units.

b) Total cost = ATC*q

Total cost = 4.64*35 = $162.40

c) Profit = Total Revenue – Total Cost

Profit = 6*35 – 162.40 = $47.60

d) At price = $5.50 he will sell 30 units of ear buds. Profit will be equal to

Profit = (5.50 - 4.42)*30 = $32.40

e) The correct answer is option d) because profit now be zero.

10) The correct answer is c) because in the short run shut down point is where price - averge variable cost. Thus, firm is not able to cover fixed cost.